In a down economy, SaaS revenues rise

Adoption of SaaS isn't necessarily painless, but users see benefits

The economic downturn has been punishing to many IT vendors, but not software-as-a-service vendors. SaaS providers are seeing double-digit growth in their subscription revenue, according to a new study by Forrester Research Inc.

"I think SaaS has an element of being recession-proof," said Ray Wang, a Forrester analyst who follows this market. But he includes a number of caveats: Many companies are moving cautiously with small SaaS deployments, short contracts and even month-to-month agreements. "People are likely to be commitment-phobic," he said.

And subscription revenue reported by SaaS vendors is still relatively small, which magnifies revenue growth numbers. For instance, Ariba Inc. in Sunnyvale, Calif., saw a 73% jump in subscription revenue, from $18.8 million to $32.6 million, in the third quarter of 2008 from the quarter a year ago. Ariba makes spending and contract management software.

But of the 10 companies to which Forrester mapped subscription revenue, most showed gains above 40%, according to a report released yesterday. NetSuite Inc., a provider of business management and CRM offerings in San Mateo, Calif., saw a 44% revenue increase, from $28 million to nearly $40.5 million in the third quarter of 2008 from the year-ago quarter. Matching that percentage increase in this study was Inc., whose subscription revenue over that same period jumped from $176.4 million to $253 million.

And while SaaS is largely thought of as software used by small and midsize businesses, enterprises are the largest users, Wang said. For instance, last year, Singapore-based Flextronics International Ltd. began implementing Walnut Creek, Calif.-based Workday Inc.'s SaaS to replace 80 human resources systems used in 30 countries in support of 200,000 employees.

What happens to SaaS revenue over the next few quarters will tell how resilient it is to the economy, but SaaS seems particularly appealing to smaller companies, such as Berkeley HeartLab Inc., a Burlingame, Calif., company with some 300 employees. The firm, which provides support on nutrition, exercise and other issues for heart patients, moved to a SaaS provider, TimeTrade Systems Inc. in Bedford, Mass., earlier this year to manage schedules.

The migration required integrating data from Berkeley's custom management application to the SaaS scheduling system. Work began in earnest last January, with deployment by April. Mitt Sitter, a senior project manager at Berkeley, said accomplishing the SaaS data integration required a close working relationship between Berkeley's application developers and those at TimeTrade. His advice to other potential SaaS users is to "get the technical staff to talk to each other early, before you even get a contract signed, to make sure you know what you are getting into."

Sitter isn't from the IT side of the business, but it's not uncommon to find SaaS vendor management handled by business users who know how to work with internal IT. One thing that Sitter said was key was for "both teams to have a familiarity with the other's applications."

An aspect of SaaS that is potentially appealing in a down economy is the ability to add new functionality to a business without capital cost. But that doesn't mean that SaaS is necessarily less costly over the long term.

Springs Valley Bank & Trust Co. in Jasper, Ind., moved to a SaaS payroll application that ran on an in-house desktop system from Progress Software Corp. in Bedford, Mass., and its application partner Unicorn HRO Inc., an HR benefits and payroll provider.

Craig Buse, the IT manager at Spring Valley, said the payroll system was nearing end of life and, moreover, it wasn't core to the bank's operation. When he learned that the payroll service was available via SaaS about a year ago, the bank adopted it.

Buse said that with SaaS, he doesn't have to worry about updating the software or hardware failures, but it may be more costly over time than an internally hosted application. "In general, you are probably going to see a little bit of cost increase because they are doing a little more for you," he said.

Copyright © 2009 IDG Communications, Inc.

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